A Political Theory of Corporate Taxation

69 Pages Posted: 16 Sep 1999 Last revised: 24 Apr 2012

Date Written: August 22, 1994

Abstract

This paper examines why the United States persists in taxing corporate income twice -- once at the corporate level and again at the shareholder level. The continued imposition of double taxation is puzzling: the double tax is widely recognized as being but unfair and inefficient, and it places a substantial burden on a powerful interest group, publicly-held corporations. Nevertheless, proposals to eliminate the double tax by integrating the corporate and individual tax invariably die a quiet death. We argue that the resilience of the corporate tax is a manifestation of the most enduring source of problems in corporate law, the separation of ownership and control in publicly-held corporations. As a result of this separation, shareholders and managers often have divergent objectives: in particular, managers are more concerned with promoting new investments. Accordingly, managers do not lobby in favor of integration because it creates a windfall for old capital; rather they lobby for benefits to new capital such as Accelerated Depreciation and Investment Tax Credits. Moreover, some managers will actively oppose integration because they benefit from the retained earnings trap created in certain circumstances by the double tax.

JEL Classification: G3, G31, G34

Suggested Citation

Arlen, Jennifer and Weiss, Deborah M., A Political Theory of Corporate Taxation (August 22, 1994). 105 Yale Law Journal, pp. 325-391, 1995; NYU Law and Economics Research Paper. Available at SSRN: https://ssrn.com/abstract=5528

Jennifer Arlen (Contact Author)

New York University School of Law ( email )

40 Washington Square South
New York, NY 10012-1099
United States

HOME PAGE: http://https://its.law.nyu.edu/facultyprofiles/profile.cfm?personID=20658

Deborah M. Weiss

Northwestern University School of Law ( email )

600 North Lake Shore Drive
Chicago, IL 60601
United States

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